The Political Winners and Losers of a Debt Ceiling Showdown

Assistant Editor Bryce Covert sat down with Roosevelt Institute Senior Fellow Bo Cutter, who was director of the National Economic Council and Deputy Assistant to the President from 1992-1996 in the Clinton White House. In the second of a two-part interview, he calculates how likely a default is, looks at the extremism on the Republican side preventing negotiations, and games out a winning strategy for the administration.

Bryce Covert: What are the odds of the debt ceiling being raised?

Bo Cutter: I would put the odds of a default at 15 or 20 percent. Sounds low, but it ought to be zero. It is so inconceivable to me that it wouldn’t be raised. It’s not like the shut down where there was a fairly large number of people who wanted one and there was another set of people — I was in that other set of people — who thought that if we were going to play those games, I’d rather have a shut down than a default. Unlike then when there were people who could figure out arguments for why we ought to have a shut down, no one can come up with a good argument for why we should have a default.

There are three kinds of players in this. There’s the administration, which basically wants to do everything it possibly can to not have a default. Part of that is that they are responsible. There’s a real sense of fiduciary responsibility for the country. So they’re out there trying to avoid it. Group two is the set of people, a set of the Congressional Republicans, who fundamentally believe it doesn’t matter, that there isn’t an effect. I don’t see how you change their minds other than have a real problem. Group three is a dangerous group. It’s the other group of Congressional Republicans who believe that it would be a very bad thing to do, but they’re going to push it for all they can and run some risks. For example, that’s where Newt Gingrich was on Meet the Press and that’s where a lot of them are. Some of them are there because they think that’s the right way to negotiate and the problem is not as big as people think. Others are there because that’s the politically convenient place to be. That’s the dangerous group, and that’s where the miscalculation can occur.

Bryce Covert: What were the circumstances you faced when dealing with this battle during the Clinton administration?

Bo Cutter: Remember that we had lots more time and in effect by being able to push it off and to run an extremely active communications campaign about how truly insane this was, we got the debt ceiling raised without having to give anything. Because in the negotiations our side was saying to their side, how much pain do you want to take? We can do this for a long time, and at the end of the day good things don’t happen if there’s a default. So you’re not going to do it anyway, but between now and then we’re going to beat you over the head every day on this issue. Do you really want to have this fight? They then decided, okay, we’ll do a shut down and the mechanism we’ll use will not be the debt thing because we’ve concluded that’s the third rail. Rather, it’ll be the budget.

The difficulty for them under those circumstances was having already been beat like a rug on the budget stuff. They were weakened. The shut down, as I said when it was getting close, is quite hard to sustain because the administration tends to speak with one voice while the Congress speaks with a hundred. There’s a kind of cacophony on the one hand and a single voice on the other. If the single voice is saying every single day why are these crazies doing this to the American people, they get tired of it in a hurry.

Bryce Covert: What are the differences between now and then?

Bo Cutter: This time around you knew going into it, and the “it” is this whole set of fights over the budget, you knew they were going to be different. You knew that there’s a much more extreme set of Congressional Republicans, incomparably more extreme, than during the Clinton administration. Second, the wiggle room around the default was much less and the budget issue hit first. So my theory was that President Obama should absolutely have forced them into a situation where they had to choose to close down the government. They should not have given a dime on that. I think there is no question that he would have won a shut down battle for all the above reasons.

If you win the shut down battle and then you go into the default battle, you’ve already won. These guys do not want that pain again. So if you had the shut down battle in mid-March you’d have had two to three months to have the debt ceiling fight. I personally felt at the time that he’d win the shut down battle and it would almost certainly mean reelection. I think he’s going to be reelected anyway, but it would have been such a thorough and complete defeat and it would have ended any fight about default.

So I think they chose the wrong path there. I think they did it because there is an inevitable tendency in Washington and in government to think that the current deal is the deal you have to get rather than thinking much more strategically and choosing the terrain on which you want to fight. I’d rather fight the shut down battle than fight the default battle.

Bryce Covert: Who are the key players then and now and are there any differences?

Bo Cutter: I think the administration side of it is every bit as capable as we were. Some of them are the same players, and the ones who aren’t are pretty able people. I don’t think there’s a big difference on the Democratic side. On the Republican side, I think that they have a much, much more difficult caucus to manage than the Republicans then did because the extreme wing is so much more extreme. They believe that they won the shut down battle, they got $38 billion worth of cuts. So you’ve got this extreme group elected six months ago that thinks they won their first battle. The reasonable — reasonable being a term you have to qualify in these circumstances — Republican leaders have crazies on their hands that they have to manage. My own sense is that the leaders probably would have preferred a short, abrupt, losing shut down battle to this scenario. Because they knew they were going to be in a situation where their crazies were pushing them right off a cliff. I think the dynamics are much worse, but it isn’t on the quality of the people on the Democratic side. It’s the structure of the caucus on the Republican side.

Bryce Covert: If we go into default, who will end up being the political losers and winners?

Bo Cutter: It depends on who does what in the next two months. If the administration doesn’t create the right kind of narrative, I think it’s likely to be the one that’s blamed. Although it’s never all or nothing. If you were President Obama, this is such an awful set of circumstances it’s hard to even imagine scenarios, but you would say to yourself that the Congressional approval level is in the low double digits, like 11. Mine is about 50%. So I have five times the approval rating and I can afford, if I had to, the blip to 40%, but they can’t take the blip to zero. If they’re absolutely pushing me right against the wall and there is no give and no reasonable proposal, if I’m President Obama I probably say I’m still better off by holding. But it’s a real close call.

Gingrich basically stated what the Republican strategy is going to be. He said they’re not going to go into default. The country would come down hard on all of the leadership. But he said what we can do is take a bite, raise the debt ceiling by $10 billion, it will last for a relatively small time, and the administration will have to give. Then we’ll raise it by $60 billion. That’s two weeks, so we’ll come back two weeks later. And we’ll just keep doing that over and over and over and force them into giving.

I really believe that it depends on what the administration does to prepare. There’s a lot they can do, and there are actual proposals you can make. I think President Obama’s strategy has to be a process strategy. It has to be to say we are not going to agree on policy. We can come to some really vague, really general framework about the general numbers. Obama has made a ten-year proposal for a $4 trillion reduction in debt total and therefore a substantial reduction in debt as a percentage of GDP. If you look at Congressman Ryan’s proposal, in reality he proposes a lot less than that because there’s a lot of fakery in his numbers, but you could dress it up and say that he proposes about that amount. Therefore he and Obama are in rough agreement that something like $4 trillion in debt reduction has to occur in the next ten years. Obama can say let’s agree to that. Let’s agree to a process by which every six months or so, if Congress hasn’t enacted and the president hasn’t signed legislation that actually makes that happen, there are automatic across the board cuts and there are automatic tax increases. We can have a battle about how much and who does what. But in other words, President Obama’s proposal would be let us agree on a framework for debt and understand as grown ups that we are not in the next two or three months going to agree on fundamental policy differences. If I were him, I would put that out there and I would campaign on it every day. I think that’s the only way they win it. I think otherwise they are caught in this bite by bite by bite and are running a real risk of miscalculation. That’s my big worry, is that that the Republicans argue, well, we know that a default shouldn’t occur but let’s push a little harder. That side is running a big, big risk.

There is also governance point about this. What the hell right does the political leadership of any party have to impose these kinds of risks on the American people? I increasingly think they just forget whether you’re for or against a particular Medicare policy or whatever, as a matter of governance and in a country that’s supposed to consist of free government and free citizens, just what the hell right do they have to do that? This is a different game than a shut down. These are big damn risks.